Cattle futures started mixed Monday but tried to turn higher with hogs and row crop futures mostly higher.
Cattle Have Tough Week
Cattle futures were trying to bounce on Monday after a poor week last week as both live and feeder cattle futures had lower weekly closes for a second week.
Brad Kooima, Kooima Kooima Varilek, says the cattle charts look tough right now.
“August live cattle, we actually took out that low that we made the day we found out the first confirmed case of screw worm in Texas. You know, we had that sharply lower trade and then actually we came right on back and close higher that day. But we did take that low out on the August cattle. We did not do it on the feeder cattle, didn’t do it on the October cattle,” he says.
But he further explains that both live and feeder cattle futures are trading below the key 100 day moving averages.
“I’d love to sit here and tell you all the shimmering good news. People tell me Brad the numbers are tight and I agree and that’s why we’re up here at these price levels but that’s priced into the market.”
Lower Cutouts
He says boxed beef demand has also been sluggish past the July 4th holiday.
“That’s been sketchy at best particularly for the middle meats and the demand for the grind continues to be very very good,” he says as the demand starts to shift from steaks to burgers and hot dogs.
Lower Cash Cattle
The other problem includes lower cash last week. The volume was at mostly $248 in the North and South, so $7 to $8 lower than the previous week’s $255 trade. Dressed at $393, down $10.
“And its $10 to $14 below two weeks ago I mean I did get $262 two weeks ago,” he adds.
So traders may look at that and determine if cash is $5 lower again next week and then the week following, the August live cattle contract is fairly priced.
Futures remain at a huge discount to the cash trade which has been that way for a long time but that has made it easier to break the cash market.
Still Kooima is worried that when the two converge it will be because the cash meets the futures down at the current low levels.
Producer Leverage Lost
He says the key to the cash market has been that producers have lost their leverage to the packers.
“July’s always been a high formula month for cattle. And it seems like they’re using all that captive type supply to keep them out of the markets.
Kooima says the difference between a good market and a bad market in one word, is “leverage.”
That also makes the higher weights a bit of a concern.
Kooima says, “We’ve got a bunch of 1,700. pound cattle that everybody dialed into their break even to make them big for these things to work. It’s worked because the packer doesn’t care if they’re big as feeder cattle replacement costs are high, feeds cheap. But it’s something I’m watching very carefully.”
Are Cattle Bottoming?
Even with the correction and futures trading below key moving averages the long term uptrend lines are still intact.
Meanwhile, funds have liquidated, as of last Tuesday’s Commitment of Traders Report, about 6,000 live cattle contracts and 1,400 long feeder cattle contracts.
So, are the cattle futures close to bottoming?
Kooima says the live cattle need to hold between $228 and $230 on a front month, October at $231.
Cash Feeders to Save the Day?
The cash feeder market has continued to provide the leadership in the cattle market and help the futures rebound back time and time again.
So, can cash feeders again save the day?
Kooima says with cash feeders sold at livestock auctions it is true price discovery but last week a notable video auction showed some weakness in the calf market.
“I think we have a tendency to pay for feeder cattle based on what we just made on the last set of fat cattle,” he says.
So it isn’t all tied to supply. It also has to do with demand and the willingness of feedlot operators to buy for fear of losing out on making money.
“I would guess that the feeders would be the last to break. What seems to be very resilient demand for these cash feeders might sustain this feeder cattle market,” he says.
But adds that if live cattle continue to break and feedlots start losing money that will be the tipping point.
Hogs See Short Covering
Lean hog futures were higher in the August and October contracts last week.
So is the market finally starting to see funds cover their near record short position?
Kooima says the August contract did get above the 40 day moving average, then got stopped out by the 50 day.
“If we could get a couple of them to cross here, I think that would trigger some more buying. It’s as good as this chart’s looked in a long time. I’d like to see August get about $103 to produce real short covering by the funds,” he adds.
Plus, the fundamental news is getting better with higher cutouts on Friday by $2.53.
Corn and Soybeans Higher on Weather
Corn and soybeans gapped higher Sunday night with the backdrop of a friendly WASDE, China buying and higher weekly closes.
However, the big key is weather, so how far will the market rally?
Kooima says, “It’s not too late for a weather market. I think we’re trading weather. You have to look back to 2012 to find a year where we rallied corn and beans during the month of July. I mean, a significant rally where you ended up higher at the end of the month than you were at the beginning of the month. 2012 is the $8 corn year.”
However, that year the U.S. saw very tight carryout and a monster drought.
Still he says there is a convergence of positive news for the market to digest.
“I would be inclined to think that, you know, there’d be better chance at upside from here, you know, based on some demand, China news, it’s a gap higher on the, on the corn today. That’s a gap higher through the last high. So I shouldn’t, I guess, be too disappointed.
Although four or five higher, it seems to me like we could be doing better, but maybe we’re not closed yet.”
